Buy This Growth Company at a Value Price

Ted is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Teen fashion retailers are inherently risky. Despite having strong brand recognition and a degree of brand loyalty, these retailers have no durable competitive advantages due to the volatile nature of their customers' habits. However, the uncertainty regarding the future business results of these retailers does not make them uninvestable; every now and then, a company will trade at such a low price that the business risk is more than discounted by the stock price. Such is the case for Guess? (NYSE: GES), which trades at a substantial discount to historical results despite having an enormous growth opportunity in front of it.

Cheap Based on Historical Results
Since 2002, Guess? has averaged a nearly 25% pre-tax return on tangible invested assets. This average includes a rough 2002, and subsequent years when the retailer was still struggling to reach sufficient scale.

<img src="/media/images/user_13490/ges-ptronca_large.png" />

If you take this depressed average return and apply it to the company's tangible invested assets in the most recent quarter, you get normalized pre-tax earnings of $344 million. At a pre-tax earnings multiple of 7, the company is worth more than $28 per share.

However, if you use the average return on tangible assets since 2005 -- 34.68% -- and apply the same multiple, you get a value of nearly $40 per share. However you slice it, Guess? looks cheap based on historical performance.

Business is Improving

Guess? has made significant improvements to profitability over the last decade. Its operating margin has improved significantly as the company has reached scale in its major markets and had a relatively good run predicting fashion trends and managing inventory. By comparison, Abercrombie & Fitch (NYSE: ANF) and American Eagle Outfitters (NYSE: AEO) have experienced sharp declines in profitability because of the difficult operating environment since the recession.

<img src="/media/images/user_13490/ges-ebit_large.png" />

One of the reasons Guess?'s margins have held up while its competitors' plummeted is its growing licensing segment. Licensing is an asset-light, high-margin business that takes advantage of the company's strong brand recognition. Licensing growth is one of the key reasons that Guess looks like an attractive investment.

Growth On Horizon

In addition to continuing to grow its licensing division, Guess has a number of opportunities to bolster profits in Europe. The company is currently planning a big push into Spain, Germany, Northern Europe, and Russia over the next five years. This expansion further diversifies the company away from the United States economy; the company will soon generate more sales from abroad than it does in North America. Despite the weak operating environment in Europe as of late, the company's growing presence on the continent should ultimately create value for shareholders in the long-run.

Final Thoughts

Guess? is growing quickly -- especially in Europe -- but is trading at a discount to its historical operating results. The company's licensing operations are golden and should lead to increased profitability in the coming years. In addition, the Marciano brothers own a significant minority stake in the business, further aligning their interests with those of long-term shareholders.

Investing in consumer retailers is not for investors who cannot stomach volatility; Mr. Market's mood can swing violently based one just one quarter of same-store sales data. But investors who believe in the company's business model -- and can stay with it for the long-run -- may find Guess? an attractive investment at its currently-depressed price.

titans8904 has no position in any stocks mentioned. The Motley Fool recommends Guess?, Inc.. The Motley Fool owns shares of Guess?, Inc.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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